SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11535
CITY NATIONAL BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2434751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Broad Street, 07102
Newark, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (973) 624-0865
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of each class
Common stock, par value $10 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of August 12, 1999 was approximately $1,570,850.
There were 119,571 shares of common stock outstanding at August 12, 1999.
<PAGE>
2
Index Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1999 and
December 31, 1998 ...................................................3
Consolidated Statement of Income for the Six Months Ended June 30,
1999 and 1998 and for the Three Months Ended June 30, 1999 and 1998..4
Consolidated Statement of Changes in Stockholders' Equity for the Six
Months Ended June 30, 1999 and 1998..................................5
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1999 and 1998...............................................6
Notes to Consolidated Financial Statements ..........................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...............................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk .........12
Part II. Other Information...................................................13
Item 1. Legal proceedings....................................................13
Item 4. Submission of matters to a vote of security holders..................13
Item 5. Other Matters ......................................................13
Item 6. Exhibits and Reports on Form 8-K.....................................13
Signatures ..................................................................14
<PAGE>
3
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
June 30, December 31,
Dollars in thousands, except per share data 1999 1998
================================================================================
Assets
Cash and due from banks ............................... $ 2,774 $ 20,467
Federal funds sold .................................... 9,060 1,500
Interest bearing deposits with banks .................. 2,322 25
Investment securities available for sale .............. 36,055 32,254
Investment securities held to maturity
(Market value of $30,429 at June 30,
1999 and $31,580 at December 31,1998) ............... 31,553 31,712
Loans held for sale ................................... 1,372 2,026
Loans ................................................. 70,425 71,440
Less: Reserve for possible loan losses ................ 1,200 1,415
--------- ---------
Net loans ............................................. 69,225 70,025
--------- ---------
Premises and equipment ................................ 3,282 3,308
Accrued interest receivable ........................... 1,204 1,110
Other real estate owned ............................... 529 590
Other assets .......................................... 1,995 1,884
--------- ---------
Total assets .......................................... $ 159,371 $ 164,901
========= =========
Liabilities and Stockholders' Equity
Deposits:
Demand .............................................. $ 20,569 $ 16,919
Savings ............................................. 33,383 57,523
Time ................................................ 72,964 63,501
--------- ---------
Total deposits ........................................ 126,916 137,943
Short-term borrowings ................................. 6,000 18
Accrued expenses and other liabilities ................ 781 1,068
Long-term debt ........................................ 15,749 15,749
--------- ---------
Total liabilities ..................................... 149,446 154,778
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value: Authorized
100,000 shares;
Series A , issued and outstanding 8
shares in 1999 and 1998 ......................... 200 200
Series B , issued and outstanding 20
shares in 1999 and 1998 ......................... 500 500
Series C , issued and outstanding 108
shares in 1999 and 1998 ......................... 27 27
Series D , issued and outstanding 3,208
shares in 1999 and 1998 ......................... 820 820
Common stock, par value $10: Authorized
400,000 shares; 118,780 shares issued in
1999 and 1998, 118,221 shares outstanding
in 1999 and 1998 .................................. 1,188 1,188
Surplus ............................................. 938 938
Retained earnings ................................... 6,635 6,442
Accumulated other comprehensive (loss)
income, net of tax ................................ (366) 25
Treasury stock, at cost - 559 shares in 1999 and 1998 (17) (17)
--------- ---------
Total stockholders' equity ............................ 9,925 10,123
--------- ---------
Total liabilities and stockholders' equity ............ $ 159,371 $ 164,901
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
4
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Six months ended Three months ended
Consolidated Statement of Income (Unaudited) June 30, June 30,
Dollars in thousands, -----------------------------------------
except per share data 1999 1998 1999 1998
================================================================================
Interest income
Interest and fees on loans ......... $ 3,021 $ 2,599 $ 1,509 $ 1,318
Interest on Federal funds sold
and securities purchased under
agreements to resell ............. 175 314 73 178
Interest on other short term
investments ...................... 22 -- -- --
Interest on deposits with banks .... 2 1 -- --
Interest and dividends on
investment securities:
Taxable .......................... 1,791 1,724 924 864
Tax-exempt ....................... 114 107 56 54
--------- --------- --------- ---------
Total interest income .............. 5,125 4,745 2,562 2,414
--------- --------- --------- ---------
Interest expense
Interest on deposits ............... 1,871 1,926 957 926
Interest on short-term borrowings .. 66 96 33 54
Interest on long-term debt ......... 438 240 219 185
--------- --------- --------- ---------
Total interest expense ............. 2,375 2,262 1,209 1,165
--------- --------- --------- ---------
Net interest income ................ 2,750 2,483 1,376 1,249
Provision for possible loan
losses ........................... 184 497 141 459
--------- --------- --------- ---------
Net interest income after
provision for possible loan
losses ........................... 2,566 1,986 1,235 790
--------- --------- --------- ---------
Other operating income
Service charges on deposit accounts 276 319 149 170
Other income ....................... 477 366 206 179
Net gain on sales of investment
securities available for sale .... 15 9 -- 1
--------- --------- --------- ---------
Total other operating income ....... 768 694 355 350
--------- --------- --------- ---------
Other operating expenses
Salaries and other employee benefits 1,370 1,323 697 679
Occupancy expense .................. 199 168 97 88
Equipment expense .................. 206 183 106 95
Other expenses ..................... 777 757 373 431
--------- --------- --------- ---------
Total other operating expenses ..... 2,552 2,431 1,273 1,293
--------- --------- --------- ---------
Income (loss) before income tax
expense .......................... 782 249 317 (153)
Income tax expense (benefit) ....... 269 51 110 (85)
========= ========= ========= =========
Net income (loss) .................. $ 513 $ 198 $ 207 $ (68)
========= ========= ========= =========
Net income (loss) per common share
Basic .............................. $ 3.43 $ 1.01 $ 1.75 $ (.60)
Diluted ............................ 3.12 0.93 1.59 (.60)
========= ========= ========= =========
Basic average common shares
outstanding ...................... 118,221 114,141 118,221 114,141
Diluted average common shares
outstanding ...................... 132,071 127,991 132,071 114,141
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
5
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Changes
in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Preferred Retained Comprehensive Treasury
Dollars in thousands, except per share data Stock Surplus Stock Earnings Income (Loss) Stock Total
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 ........................ $ 1,150 $ 901 $ 1,547 $ 6,497 $ (38) $ (25) $ 10,032
Comprehensive income:
Net income ........................................ -- -- -- 198 -- -- 198
Unrealized gain on securities
available for sale, net of tax .................. -- -- -- -- 19 -- 19
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income, net of tax .......... 217
Dividends paid on preferred stock ................. -- -- -- (82) -- -- (82)
Dividends paid on common stock .................... -- -- -- (199) -- -- (199)
-------- -------- -------- -------- -------- -------- --------
Balance, June 30, 1998 ............................ $ 1,150 $ 901 $ 1,547 $ 6,414 $ (19) $ (25) $ 9,968
======== ======== ======== ======== ======== ======== ========
Balance, December 31, 1998 ........................ $ 1,188 $ 938 $ 1,547 $ 6,442 $ 25 $ (17) $ 10,123
Net income ........................................ -- -- -- 513 -- -- 513
Unrealized loss on securities
available for sale, net of tax .................. -- -- -- -- (391) -- (391)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income, net of tax .......... 122
Dividends paid on preferred stock ................. -- -- -- (107) -- -- (107)
Dividends paid on common stock .................... -- -- -- (213) -- -- (213)
-------- -------- -------- -------- -------- -------- --------
Balance, June 30, 1999 ............................ $ 1,188 $ 938 $ 1,547 $ 6,635 $ (366) $ (17) $ 9,925
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
6
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
Six Months Ended
June 30,
--------------------
In thousands 1999 1998
================================================================================
Operating activities
Net income ............................................. $ 513 $ 198
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization ........................ 199 179
Provision for possible loan losses ................... 184 497
Premium amortization (discount accretion)
on investment securities ........................... 38 (30)
Net gains on sales and early redemptions
of investment securities ........................... (15) (9)
Gains on loans held for sale ......................... (21) --
Loans originated for sale .............................. (380) (876)
Proceeds from sales of loans held for sale ............. 762 --
(Increase) decrease in accrued interest
receivable ........................................... (94) 61
Deferred income tax benefit ............................ (12) (12)
Increase in other assets ............................... (111) (240)
Decrease in accrued expenses and other
liabilities .......................................... (30) (32)
-------- --------
Net cash provided by (used in) operating
activities ........................................... 1,033 (264)
-------- --------
Investing activities
Decrease in loans ...................................... 910 196
Increase in interest bearing deposits with banks ....... (2,297) --
Proceeds from maturities of investment securities
available for sale, including sales, principal
payments and calls ................................... 11,692 7,308
Proceeds from maturities of investment securities
held to maturity, including principal payments
and calls ............................................ 7,154 8,543
Purchases of investment securities available for sale .. (16,143) (5,329)
Purchases of investment securities held to maturity .... (7,005) (6,499)
Purchases of premises and equipment .................... (173) (369)
Decrease in other real estate owned, net ............... 61 49
-------- --------
Net cash (used in) provided by investing activities .... (5,801) 3,899
-------- --------
Financing activities
Increase in long-term debt ............................. -- 10,000
(Decrease) increase in deposits ........................ (11,027) 5,358
Increase in short-term borrowings ...................... 5,982 1,787
Dividends paid on preferred stock ...................... (107) (82)
Dividends paid on common stock ......................... (213) (199)
-------- --------
Net cash (used in) provided by financing activities .... (5,365) 16,864
-------- --------
Net (decrease) increase in cash and cash equivalents ... (10,133) 20,499
Cash and cash equivalents at beginning of period ....... 21,967 13,260
-------- --------
Cash and cash equivalents at end of period ............. $ 11,834 $ 33,759
======== ========
Cash paid during the year:
Interest ............................................... $ 2,458 $ 2,001
Income taxes ........................................... 339 424
See accompanying notes to consolidated financial statements.
<PAGE>
7
CITY NATIONAL BANCSHARES CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
1. Principles of consolidation
The accompanying consolidated financial statements include the accounts of City
National Bancshares Corporation (the "Corporation") and its subsidiary, City
National Bank of New Jersey (the "Bank" or "CNB"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
2. Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the financial statements have been included. Operating results for the three and
six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31,1999.
3. Net income per common share
Basic income per common share is calculated by dividing net income less
dividends paid on preferred stock by the weighted average number of common
shares outstanding. On a diluted basis, both net income and common shares
outstanding are adjusted to assume the conversion of the convertible subordinate
debentures.
<PAGE>
8
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of operations
Net income rose to $513,000 in the first half of 1999 from $198,000 for the
similar 1998 period. Related earnings per share on a diluted basis increased to
$3.12 from $.93. 1999 second quarter net income increased to $207,000 compared
to a $68,000 net loss a year earlier. The earnings improvement in both periods
resulted from increased net interest income along with a reduction in the
provision for possible loan losses.
Total assets declined from $164.9 million at the end of 1998 to $159.4 million
at June 30, 1999, reflecting the withdrawal of a nonrecurring $15.9 million
municipal deposit received at the end of 1998. Average total assets rose 11.8%
for the first half of 1999 compared to the 1998 first half, to $155.4 million
from $139 million, due primarily to deposit growth.
Net interest income
In the first half of 1999, net interest income on a tax equivalent basis rose
10.6% from the same 1998 period, while the related net interest margins were
3.90% compared to 3.94%. The increased income resulted from higher levels of
earning assets, while the lower interest margin was due to pressures from a
lower interest rate environment. Net interest income on a tax equivalent basis
rose 10.1% in the second quarter of 1999 compared to the second quarter of 1998,
while the net interest margin in the 1999 second quarter increased slightly to
3.89% compared to 3.86% a year ago.
Interest income on a tax equivalent basis rose 8% in the first half of 1999
compared to the first half of 1998 due to the additional earnings generated from
the purchase of $15.6 million of loans at the end of 1998. Interest expense rose
5% between the same periods due to higher interest-bearing liability levels. The
average rate paid fell 24 basis points, from 4.12% to 3.88%, due to the lower
interest rate environment.
Interest income on a tax equivalent basis increased 7% in the second quarter of
1999 compared to a year earlier, also primarily due to the income earned on the
aforementioned loans. Interest expense rose 3.8% in the 1999 second quarter
compared to a year earlier due to the increased levels of interest-bearing
liabilities.
Provision and reserve for possible loan losses
Changes in the reserve for possible loan losses are set forth below.
Six Months Three Months
Ended June 30, Ended June 30,
(Dollars in thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Balance at beginning of period ......... $1,415 $ 825 $1,075 $ 825
Provision for possible loan losses ..... 184 497 141 459
Recoveries of previous charge-offs ..... 28 53 17 7
------ ------ ------ ------
1,627 1,375 1,233 1,291
Less: Charge-offs....................... 427 100 33 16
------ ------ ------ ------
Balance at end of period ............... $1,200 $1,275 $1,200 $1,275
====== ====== ====== ======
Management believes that the reserve for possible loan losses is adequate based
on an ongoing evaluation of the loan portfolio. This evaluation includes
consideration of past loan loss experience, the level and composition of
nonperforming loans, collateral adequacy, and general economic conditions,
including the effect of such conditions on particular industries.
While management uses available information to determine the adequacy of the
reserve, future additions may be necessary based on changes in economic
conditions or in subsequently occurring events unforeseen at the time of
evaluation.
June 30, December 31, June 30,
(Dollars in thousands) 1999 1998 1998
- --------------------------------------------------------------------------------
Reserve for possible loan losses as a percentage of:
Total loans ................................ 1.70% 1.98% 2.26%
Total nonperforming loans .................. 75.76% 78.51% 53.04%
Total nonperforming assets
(nonperforming loans and OREO) ........... 56.79% 53.78% 41.57%
Net charge-offs as a percentage
of average loans (year-to-date) .......... .55% .72% .08%
<PAGE>
9
Nonperforming loans
Nonperforming loans include loans on which the accrual of interest has been
discontinued or loans which are contractually past due 90 days or more as to
interest or principal payments on which interest income is still being accrued.
Nonaccrual loans include loans where principal or interest income is still being
accrued. Delinquent interest payments are credited to income when received. The
following table presents the principal amounts of nonperforming loans past due
90 days or more and accruing.
June 30, December 31, June 30,
(Dollars in thousands) 1999 1998 1998
- --------------------------------------------------------------------------------
Nonaccrual loans
Commercial .............................. $ 834 $1,148 $1,489
Installment ............................. -- 1 1
Real estate ............................. 406 306 310
------ ------ ------
Total ................................... 1,240 1,455 1,800
------ ------ ------
Loans past due 90 days
or more and still accruing
Commercial .............................. -- -- 230
Installment ............................. -- -- --
Real estate ............................. 344 341 374
------ ------ ------
Total ................................... 344 341 604
------ ------ ------
Total nonperforming loans ............... 1,584 1,796 2,404
------ ------ ------
Troubled debt restructurings ............ 1,261 1,261 1,261
------ ------ ------
Total loans and troubled
debt restructurings ................... $2,845 $3,057 $3,665
====== ====== ======
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders, and certain affiliates of such entity
for fraud and other damages. CNB alleges, among other things, that at various
times during its business relationship with the defendants, the defendants
stole, misappropriated, hypothecated or embezzled a sum of approximately
$805,000 from CNB. The defendants have responded alleging CNB records regarding
these transactions are in error and in fact CNB is liable to the defendants for
amounts due as a result of these errors and for damages incurred by the
defendants as a result of CNB's collection efforts. The amount of the
defendants' counterclaim has not been quantified. This litigation is in the
midst of discovery. The likelihood of CNB's success in this litigation and its
ability to recover any amount for which it obtains judgment is uncertain. CNB
has filed appropriate proofs of loss under various insurance policies, including
CNB's fidelity bond. It is also too early to determine the amount CNB will
ultimately recover, if any, under these insurance policies.
Based on an evaluation of the information currently available, the Bank provided
an $805,000 addition to the reserve for possible loan losses in 1998. $405,000
was charged off during the fourth quarter of 1998 and the remaining balance of
$400,000 was charged-off in the first quarter of 1999, and represented the only
impaired loan in 1999 prior to its charge-off. The average balance of impaired
loans during 1999 was $198,000.
Troubled debt restructurings includes two loans to one commercial borrower
totaling $1.3 million. A $1 million construction loan was originated in August,
1996 and subsequently increased by $200,000. Payments remained current through
June, 1997 when construction was completed and the loan was converted to a
permanent commercial mortgage, at which time principal paydowns were scheduled
to commence.
Prior to becoming 90 days past due, the terms of the loan were modified to
continue interest only payments for a specified period of time, during which the
loan performed in accordance with the modified terms. The loan has been
subsequently modified to extend the amortization period from five to thirty
years and reduce the maturity from July 1, 2003 to August 1, 1999.
While payments are being made for the revised amount, they are consistently paid
subsequent to their due date. The loan is secured by a leasehold mortgage on the
financed property and the borrower's principals have provided joint and several
personal guarantees.
In addition, a $100,000 working capital loan drawn down under a credit line
secured by receivables was originated in July, 1997. No principal amortization
is currently required. While the working capital loan is currently performing in
accordance with its original terms, at June 30, 1999, the interest payment was
thirty days past due.
<PAGE>
10
Nonperforming assets are generally secured by residential and small commercial
real estate. It is the Bank's intent to dispose of all other real estate owned
("OREO") properties at the earliest possible date at or near current market
value.
At June 30, 1999, there were no commitments to lend additional funds to
borrowers for loans that were on nonaccrual or contractually past due in excess
of 90 days and still accruing interest, or to borrowers whose loans have been
restructured.
Other operating income
Other operating income, including the results of investment securities
transactions, rose 10.7% during the six months ended June 30, 1999 compared to
the similar 1998 half, due primarily to the receipt of $51,000 from the U.S.
Department of the Treasury, under its Bank Enterprise Award Program. This
program provides financial incentives to banks making qualifying loans in
distressed communities. Other operating income for the 1999 second quarter was
slightly higher than a year earlier.
Other operating expenses
Other operating expenses rose 5% in the first half of 1999 to $2,552,000 from
$2,431,000 in the first half of 1998, with the increase attributable primarily
to the costs of operating a new branch for six months during 1999 which was
opened during May 1998. There was a slight decrease in second quarter 1999 total
other operating expenses compared with the same quarter in the preceding year as
the aforementioned costs of operating the new branch were offset by lower
marketing expenses.
Income tax expense
Income tax expense as a percentage of pretax income rose to 34.3% from 20.5% for
the first half of 1999 compared to the first half of 1998 due to tax-free
interest income from municipal securities being a higher percentage of income
before taxes in 1998. Investment securities
Investment securities available for sale ("AFS") rose to $36.1 million at June
30, 1999 from $32.3 million at the end of 1998. Most of this increase occurred
in federal agency securities, which rose from $2.2 million at the end of 1998 to
$27.9 million at June 30, 1999. Net gross unrealized losses in the AFS portfolio
rose to $608,000 at June 30, 1999 from a net gross unrealized gain of $40,000 at
1998 year-end due to the effects of an increase in interest rates during the
first half of 1999.
The held to maturity ("HTM") portfolio carried net gross unrealized losses of
$1.1 million at June 30, 1999 compared to $133,000 at December 31, 1998. This
increase was also due to the higher interest rate environment and had a
particularly negative impact on the Bank's $19.5 million portfolio of callable
agency bonds, which had net gross unrealized losses of $1.1 million compared to
$62,000 at the end of 1998. Because of their call features, these bonds tend to
reflect depreciation regardless of bond market conditions as they will earn less
than current issues if interest rates rise, whereas if rates fall, they then may
be redeemed by the issuer. However, at the time of purchase, they generally have
a higher coupon rate than similar noncallable securities.
Management believes that holding the callable securities will not have a
significant impact upon the financial condition or operations of the Corporation
and that favorable yield spreads compensate for this.
Loans
Loans declined by 1.4% at June 30, 1999 compared to December 31,1998, while
loans held for sale decreased from $2 million at December 31, 1998 to $1.4
million at June 30,1999, reflecting an increase in loan sales during the 1999
first half, compared to the first six months of 1998 when no loans were sold.
Deposits
Total deposits declined to $126.9 million at June 30, 1999 from $137.9 million
at the end of 1998, while average deposits rose 10.7%, to $125.6 million for the
first half of 1999 from $115.3 million for the first half of 1998. Year-end 1998
included a $15.9 million nonrecurring municipal savings deposit, which was
withdrawn shortly after year-end.
Average interest-bearing deposits rose for the first half of 1999 by 6.4%
primarily due to higher municipal account balances as the Bank significantly
expanded its municipal operating account relationships. Most of this growth
occurred in Super Now accounts. Time deposits averaged $59.1 million for the
first half of 1999, 6.5% less than during the first six months of 1998,
reflecting management's decision during 1998 to reduce the Bank's dependency on
expensive short-term, volatile municipal time deposits with Federal Home Loan
Bank advances.
<PAGE>
11
The Bank's deposit levels may change significantly on a daily basis because
deposit accounts maintained by municipalities represent a significant part of
the Bank's deposits and are more volatile than commercial or retail deposits.
These municipal accounts represent a substantial part of the Bank's deposits,
tend to have high balance relationships and comprised most of the Bank's
accounts with balances of $100,000 or more at June 30, 1999. These accounts are
used for operating and short-term investment purposes. All the foregoing
deposits require collateralization with readily marketable U.S. Government
securities.
While the collateral maintenance requirements associated with the Bank's
municipal and U.S. Government account relationships might limit the ability to
readily dispose of investment securities used as such collateral, management
does not foresee any need for such disposal, and in the event of the withdrawal
of any of these deposits, these securities are readily marketable.
Short-term borrowings
While total short-term borrowings increased from $18,000 at December 31, 1998 to
$6 million at the end of the 1999 second quarter, the related average balances
were $2.9 million for the first half of 1999 compared to $3.6 million for the
1998 first half, reflecting a slight reduction. These borrowings were comprised
of U.S. Treasury tax and loan note option balances, which may be withdrawn at
any time.
Liquidity
The liquidity position of the Corporation is dependent on the successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise primarily to accommodate possible
deposit outflows and to meet borrowers' requests for loans. Such needs can be
satisfied by investment and loan maturities and payments, along with the ability
to raise short-term funds from external sources.
It is the responsibility of the Asset/Liability Management Committee ("ALCO") to
monitor and oversee all activities relating to liquidity management and the
protection of net interest income from fluctuations in interest rates.
The Bank depends primarily on deposits as a source of funds and also provides
for a portion of its funding needs through short-term borrowings, such as
Federal Funds purchased, securities sold under repurchase agreements and
borrowings under the U.S. Treasury tax and loan note option program. The Bank
also utilizes the Federal Home Loan Bank for longer-term funding purposes.
The major contribution during the first six months of 1999 from operating
activities to the Corporation's liquidity came from proceeds from sales and
principal payments of loans held for sale, while loans originated for sale
represented the highest use of cash.
Net cash used in investing activities was primarily the result of the purchase
of investment securities available for sale, while sources of cash provided by
investing activities were derived primarily from proceeds from maturities,
principal payments and early redemptions of investment securities held to
maturity.
The primary source of funds from financing activities resulted from an increase
in short-term borrowings, while the highest use of cash in financing activities
resulted from a decrease in deposits.
Capital
Stockholders' equity amounted to $10.3 million at June 30, 1999 compared to
$10.1 million at December 31, 1998. This slight increase resulted from the
dividends paid in the first quarter of 1999. The Corporation pays its dividends
annually rather than quarterly. Stockholders' equity as a percentage of total
assets was 6.46% at June 30, 1999, compared to 6.14% at December 31, 1998.
Risk-based capital ratios are expressed as a percentage of risk-adjusted assets,
and relate capital to the risk factors of a bank's asset base, including
off-balance sheet risk exposures. Various weights are assigned to different
asset categories as well as off-balance sheet exposures depending on the risk
associated with each. In general, less capital is required for less risk.
At June 30, 1999, the Corporation's core capital (Tier 1) and total (Tier 1 plus
Tier 2) risked-based capital ratios were 11.73% and 14.98%, respectively.
<PAGE>
12
Year 2000
Many computer programs were written using two digits rather than four to define
the applicable year. These programs were written without considering the impact
of the upcoming change in century from 1999 to 2000, and the programs may
experience problems handling dates beyond 1999. This could cause computer
applications to fail or create incorrect information unless corrective measures
are taken. Incomplete or untimely resolution of the Year 2000 ("Y2K") issue by
the Bank, or its major borrowers and lenders, could have a material adverse
impact on the Bank's business, operations and financial condition.
During 1997, the Corporation established an overall plan to address
system-related Y2K issues. The plan calls for either system modifications to, or
replacement of, existing business systems applications, including hardware and
equipment. A majority of the systems are provided and maintained by outside
vendors with whom management is coordinating the Y2K efforts. The Bank operates
its deposit, loan and general ledger systems on one software system licensed to
the Bank through a third party ("primary software vendor"). The Bank received
the software from its primary software vendor and began testing during
September, 1998 to verify the vendor's representation that the software is Y2K
compliant. The testing for the deposit, loan and general ledger systems, which
are the primary functions of this software, has been completed as of the end of
1998. Additional Y2K software systems have been purchased from other vendors and
the Bank has substantially completed testing those systems for Y2K compliance.
All hardware and equipment not considered to be Y2K compliant has been replaced,
or replacements are on order.
The cost of this Y2K compliance program related to system modifications is
estimated to be $258,000, most of which represents capital expenditures that
will be funded through operating cash flows. At June 30, 1999, most of these
costs had been incurred, most of which were capital costs.
The Corporation has also initiated discussions with third parties, such as
vendors, customers, governmental entities, and others, to attempt to obtain
assurance that they have appropriate plans to be Y2K compliant. The Corporation
has contacted its major depositors and borrowers in order to assess their Y2K
readiness. Failure of the Corporation or third parties to correct Y2K issues
could cause disruption of operations resulting in increased operating costs. In
addition, to the extent customers' financial positions are weakened as a result
of Y2K issues, credit quality could be adversely affected.
The Corporation is preparing contingency plans in the event of Y2K system
failures, including the identification of alternative data processing methods
and alternate sources of liquidity. Additionally, the Corporation has utilized
the services of a third party to provide independent verification and validation
of its Y2K concerns. However, since it cannot predict whether its vendors and
customers will be successful in becoming Y2K compliant, it is developing
detailed contingency plans to address the potential of a disruption of
operations.
The Corporation receives guidance from the Federal Financial Institutions
Examination Council ("FFIEC"), the formal interagency body empowered to
prescribe uniform principles, standards and examination procedures for the
examination of financial institutions by the federal regulatory agencies, and
participates in scheduled federal Y2K examinations, which are being conducted to
assess each financial institution's Y2K efforts.
The cost of the project and the expected completion dates are based on
management's best estimates. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially.
Substantially all of the work under this program, including testing of mission
critical systems, has been completed.
Quantitative and Qualitative Disclosures about Market Risk
Due to the nature of the Corporation's business, market risk consists primarily
of its exposure to interest rate risk. Interest rate risk is the impact that
changes in interest rates have on earnings. The principal objective in managing
interest rate risk. Interest rate risk is to maximize net interest income within
the acceptable levels of risk that have been established by policy. There are
various strategies which may be used to reduce interest rate risk, including the
administration of liability costs, the reinvestment of asset maturities and the
use of off-balance sheet financial instruments. The Corporation has no risk
associated with off balance-sheet financial instruments.
Interest rate risk is monitored through the use of simulation modeling
techniques, which apply alternative interest rate scenarios to periodic
forecasts of changes in interest rates, projecting the related impact on net
interest income. The use of simulation modeling assists management in its
continuing efforts to achieve earnings growth in varying interest rate
environments.
<PAGE>
13
Key assumptions in the model include anticipated prepayments on mortgage-related
instruments, contractual cash flows and maturities of all financial instruments,
deposit sensitivity and changes in interest rates.
These assumptions are inherently uncertain, and as a result, these models cannot
precisely estimate the effect that higher or lower rate environments will have
on net interest income. Actual results may differ from simulated projections due
to the timing, magnitude or frequency of interest rate changes, as well as
changes in management's strategies.
Based on the results of the most current interest simulation model, if interest
rates increased or decreased 100 basis points from current rates in an immediate
and parallel shock, the Corporation would anticipate a decrease of $211,000 in
net interest income and an increase of $45,000 in net interest income,
respectively. The results do not represent a material change from the amounts
previously reported as of December 31, 1998.
PART II Other information
Item 1. Legal proceedings
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders, and certain affiliates of such entity
for fraud and other damages. CNB alleges, among other things, that at various
times during its business relationship with the defendants, the defendants
stole, misappropriated, hypothecated or embezzled a sum of approximately
$805,000 from CNB. The defendants have responded alleging CNB records regarding
these transactions are in error and that CNB is liable to the defendants for
amounts due as a result of these errors and for damages incurred by the
defendants as a result of CNB's collection efforts. The amount of the
defendants' counterclaim has not been quantified. CNB has filed appropriate
proofs of loss under various insurance policies, including CNB's fidelity bond.
This litigation is currently in the midst of discovery. The likelihood of CNB's
success in this litigation and its ability to recover any amount for which it
obtains judgment is uncertain.
Item 4. Submission of matters to a Vote of Security Holders
a) The Annual Meeting of Stockholders of City National Bancshares Corporation
was held on May 20, 1999. The stockholders voted upon the election of three
persons, named in the proxy statement, to serve as directors of the
Corporation for three years. All directors were elected at the Annual
Meeting with the number of votes "For" and "Abstained" indicated. There
were no votes "Against".
Number of Votes
Name For Abstained
Douglas E. Anderson 74,615 62
Eugene Giscombe 74,615 62
Louis E. Prezeau 74,615 62
The terms of the following directors were continued after the Annual Meeting:
Leon Ewing, Barbara Bell Coleman, Norman Jeffries, and Lemar Whigham.
Stockholders also voted upon the ratification of the appointment of KMPG LLP as
independent auditors for the fiscal year ended December 31, 1999. Stockholders
voted 74,516 shares "For" the proposal, 5 shares "Against" and 156 shares
"Abstained".
Item 5. Other Matters
a) On March 23, 1999, the Board approved the declaration of a $1.80 per share
dividend to common stockholders, payable on April 16, 1999 to stockholders of
record on March 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(a) The Corporation's Restated Articles of Incorporation (incorporated herein
by reference to Exhibit (3)(d) of the Corporation's Current Report on Form
8-K dated July 28, 1992).
(3)(b) Amendments to the Corporation's Articles of Incorporation establishing
the Corporation's Non-cumulative Perpetual Preferred Stock, Series A
(incorporated herein by reference to Exhibit (3)(b) of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995).
(3)(c) Amendments to the Corporation's Articles of Incorporation establishing
the Corporation's Non-cumulative Perpetual Preferred Stock, Series B
(incorporated herein by reference to Exhibit (3)(c) of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995).
<PAGE>
14
(3)(d) Amendments to the Corporation's Articles of Incorporation establishing
the Corporation's Non-cumulative Perpetual Preferred Stock, Series C
(incorporated herein by reference to Exhibit (3)(i) to the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996).
(3)(e) Amendments to the Corporation's Articles of Incorporation establishing
the Corporation's Non-cumulative Perpetual Preferred Stock, Series D
(incorporated herein by reference to Exhibit filed with the Corporation's
current report on Form 10-K dated July 10, 1997).
(3)(f) The amended By-Laws of the Corporation (incorporated herein by reference
to Exhibit (3)(c) of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1991).
(4)(a) The Debenture Agreements between the Corporation and its Noteholders
(incorporated herein by reference to Exhibit (4)(a) of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1993).
(4)(b) Note Agreement dated December 28, 1995 by and between the Corporation and
the Prudential Foundation (incorporated herein by reference to Exhibit
(4)(b) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
(10)(a) The Employee's Profit Sharing Plan of City National Bank of New Jersey
(incorporated herein by reference to Exhibit (10) of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1988).
(10)(b) The Employment Agreement among the Corporation, the Bank and Louis E.
Prezeau dated May 24, 1997 (incorporated by reference to Exhibit 10 to the
Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997).
(10)(c) Lease and option Agreement dated may 6, 1995 by and between the RTC and
City National Bank of New Jersey (incorporated herein by reference to
Exhibit (10)(d) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995).
(10)(d) Asset Purchase and Sale Agreement between the Bank and Carver Federal
Savings Bank dated as of January 26, 1998 (incorporated herein by reference
to Exhibit 10(d) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997).
(10)(e) Group Term Life Insurance Replacement Plan dated January 1, 1997.
(10)(f) Salary Continuation Agreement dated January 1, 1997 among the Bank, the
Corporation and Mr. Prezeau.
(10)(g) Salary Continuation Agreement dated January 1, 1997 among the Bank, the
Corporation and Mr. Weeks.
(10)(h) Director Retirement Agreement dated January 1, 1997 among the Bank, the
Corporation and Douglas E. Anderson.
(11) Statement regarding computation of per share earnings. The required
information is included on page 24.
(13) Annual Report to security holders for the fiscal year ended December 31,
1998.
(24) Power of Attorney is located on the signature page.
(27) Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CITY NATIONAL BANCSHARES CORPORATION
(Registrant)
August 13, 1999 ____________________
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)
EXHIBIT 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
City National Bancshares Corporation
Computation of Earnings Per Common Share on a
Basic & Diluted Basis
In thousands, except per share data
Six Month Ended Three Months Ended
June 30, June 30,
-------------------------------------------
1999 1998 1999 1998
Net income (loss) ................. $ 513 $ 198 $ 207 $ (68)
Dividends paid on preferred stock . 107 82 -- --
--------- --------- --------- ---------
Net income (loss) applicable to
basic common shares ............. 406 116 207 (68)
Interest expense on convertible
subordinated debentures, net of
income tax ...................... 6 6 3 --
--------- --------- --------- ---------
Net income (loss) applicable to
diluted shares .................. $ 412 $ 122 $ 210 $ (68)
========= ========= ========= =========
Number of average common shares:
Basic ............................. 118,221 114,141 118,221 114,141
========= ========= ========= =========
Diluted:
Average common shares outstanding 118,221 114,141 118,221 114,141
Average convertible subordinated
debentures convertible to
common shares ................. 13,850 13,850 13,850 --
--------- --------- --------- ---------
132,071 127,991 132,071 114,141
========= ========= ========= =========
Net income (loss) per common share
Basic ........................... $ 3.43 $ 1.01 $ 1.75 $ (.60)
Diluted ......................... 3.12 0.93 1.59 (.60)
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<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
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<INT-BEARING-DEPOSITS> 2322 40
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1547 1547
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<INCOME-PRETAX> 782 249
<INCOME-PRE-EXTRAORDINARY> 269 241
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<LOANS-NON> 2439 994
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